While much has changed over the first half of the year, the key aspects of our initial economic and market outlook for 2023 remain intact. Inflation has eased but reducing price pressures tied to wage growth will take longer. Central bank rate cuts are unlikely before 2024. A mild recession in the U.S.—and in Canada and Mexico, among other nations and regions—is more likely than not.
Roger Aliaga-Díaz, chief economist, Americas, discusses why Fed rate hikes haven’t sufficiently reduced inflation.
0.75%Economic growth, year-over-year
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3.3%Core inflation, year-over-year
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5.25%–5.5%Monetary policy rate
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4.5%Unemployment rate
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“Consumer spending has remained remarkably consistent over the past year, despite persistent inflation. If spending remains on this path, the Federal Reserve will have more work to do. Increasing the policy rate another three-quarters of a percentage point is not out of the question under such conditions.”
—Josh Hirt, Vanguard Senior Economist
Notes: The Federal Reserve sets the federal funds rate target as a goal for the level of short-term interest rates. The Fed typically sets a range for the target. The pre-pandemic trend reflects the average pace of growth in real consumer spending between 2017 and 2019.
Sources: Vanguard calculations, based on U.S. Bureau of Economic Analysis data as of June 12, 2023.
“Import prices have been easing rapidly since March 2022—and outright declining since February 2023—thanks in part to the rebuilding of supply chains disrupted by the COVID-19 pandemic. Producer or wholesale prices have been falling almost as quickly, helping to curb actual and expected consumer inflation toward the 2% target set by Federal Reserve policymakers. We think they will get there in 2025.”
—Asawari Sathe, Vanguard Senior Economist
Notes: Changes in commodity prices reflect non-seasonally adjusted data for all commodities, based on 2021 trade values. All other data reflect seasonal adjustments. Core prices exclude food and energy. The Producer Price Index (PPI) measures wholesale prices. The Consumer Price Index (CPI) measures retail prices.
Sources: Vanguard calculations, based on data from Refinitiv and Moody’s through May 31, 2023.
“The wage increases typically commanded by workers who change employers, over and above the gains made by workers who stick with their employers, is a window into labor market conditions. When the labor market tightens, employers first raise wages to attract new talent and then likewise to retain current workers, factors that can boost both economic growth and inflation. The wage-gain advantage for job switchers has been waning since the middle of 2022—an encouraging sign that inflationary pressures stemming from the labor market are abating.”
—Adam Schickling, Vanguard Economist
Notes: The chart reflects the Federal Reserve Bank of Atlanta’s Wage Growth Tracker, which uses data from U.S. Census Bureau surveys of nonfarm workers to estimate the median level of year-over-year changes in hourly wages. Each data point is an average of that month’s median wage growth rate and the median rates of the two preceding months.
Source: Federal Reserve Bank of Atlanta data as of April 30, 2023.
1.8%–1.9%Economic growth, year-over-year
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5.6%Core inflation, year-over-year
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11.25%Monetary policy rate
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4.5%Unemployment rate
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“Robust consumer spending and fixed investment have recently supported economic growth in Mexico. Given moderating inflation, real wage growth should continue to accelerate, suggesting that consumption could continue to expand. ‘Near-shoring’ activity is another positive over the medium term. Our Leading Economic Indicators Index summarizes our outlook. Nearly half of the index’s underlying indicators recently implied strong future economic activity, and more below-trend signals have been improving.”
—Vytas Maciulis, Vanguard Economist
Notes: Vanguard Leading Economic Indicators Index (VLEI) for Mexico, created to infer developing economic trends, incorporates dozens of variables on the consumer, labor market, manufacturing, exports and imports, and financial markets. Each variable is assigned a weight based on its historical correlation with economic activity and its predictive power.
Source: Vanguard, as of June 15, 2023.
Inflation appears to have peaked in Latin America, but we expect central banks to lower their interest rate targets slowly. We anticipate full-year 2023 growth around 1.5% in Latin America, slowing moderately in 2024. We foresee Latin America core inflation persisting around 6.3% in both 2023 and 2024.
0.8%Economic growth, year-over-year
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3.2%Core inflation, year-over-year
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5.%Monetary policy rate
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5.5%Unemployment rate
Since spiking to a pandemic-induced peak of 14% in 2020, unemployment has slid to 5%—well below its longer-term average of about 7%. We expect it rise in the second half of 2023, as monetary policy further tightens and the economy slows. |
“Just as accelerating transportation and energy costs played meaningful roles in Canada’s mid-2022 inflationary peak, their deceleration since then has eased the headline pace of price increases for goods and services. We believe inflation will continue to moderate in Canada in the second half of 2023 and 2024, though the moderation may be more gradual.”
—Bilal Hasanjee, Vanguard Senior Investment Strategist
Notes: The “Other” component reflects the sum of five categories: household operations and furnishings and equipment; clothing and footwear; health and personal care; recreation and education and reading; and alcoholic beverages and tobacco products.
Source: Vanguard calculations, based on data from Refinitiv, Moody’s, and the Bank of Canada as of April 30, 2023.
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